CHAPTER 11
TRANSLATION EXPOSURE
1. Translation. What does the word translation mean? Why is translation exposure called an
accounting exposure?
2. Causation. What activity gives rise to translation exposure?
3. Converting Financial Assets. In the context of preparing consolidated financial statements, are the
words translate and convert synonyms?
4. Subsidiary Characterization. What is the difference between a self-sustaining foreign subsidiary
and an integrated foreign subsidiary?
5. Functional Currency. What is a functional currency? What do you think a “non-functional
currency” would be?
6. Functional Currency Designation. Can or should a company change the functional currency
designation of a foreign subsidiary from year to year? If so, when would it be justified?
7. Translation Methods. What are the two basic methods for translation used globally?
8. Current versus Historical. One of the major differences between translation methods is which
balance sheet components are translated at which exchange rates, current or historical. Why would
accounting practices ever use historical exchange rates?
9. Translating Assets. What are the major differences in translating assets between the current rate
method and the temporal method?
10. Translating Liabilities. What are the major differences in translating liabilities between the current
rate method and the temporal method?
11. Earnings or Equity. Where do you believe that most company’s would prefer currency translation
imbalances or adjustments to go, to earnings or consolidated equity? Why?
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where currency translation adjustments were to go, it would generally prefer consolidated equity, an
item of significantly lower market inspection.
12. Translation Exposure Management. What are the primary options firms have to manage
translation exposure?
The main technique to minimize translation exposure is called a balance sheet hedge. A balance sheet
13. Accounting or Cash Flow. If a U.S.-based multinational company generates more than 80% of its
profits (earnings) outside the U.S. in the euro zone and Japan, and both the euro and the yen fall
significantly in value versus the dollar as occurred in the second half of 2014, is the impact on the
firm only accounting or does it alter cash flow, or both?
14. Balance Sheet Hedge Justification. When is a balance sheet hedge justified?
15. Realization and Recognition. When would a multinational firm, if ever, realize and recognize the
cumulative translation losses recorded over time associated with a subsidiary?
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cumulative rate of inflation of 100% or greater over a three-year period, it must use the temporal
method of translation and recognize and realize translation gains or losses in consolidated income in
the current period.
16. Tax Obligations. How does translation alter the global tax liabilities of a firm? If a multinational
firm’s consolidated earnings increase as a result of consolidation and translation, what is the impact
on tax liabilities?
17. Hyperinflation. What is hyperinflation, and what are the consequences for translating foreign
financial statements in countries experiencing hyperinflation?
18. Transaction versus Translation Losses. What are the main differences between losses from
transaction exposure and translation exposure?
Losses from transaction exposure are cash losses incurred in the near term because of a change in the